Argentina peso sinks as foreign purchases curbed

BUENOS AIRES, January 23, 2014 (AFP) – Argentina’s economic turmoil deepened Wednesday as the peso plunged and the government tightened controls on shopping at offshore websites to protect its shrinking foreign reserves.

Worries were mounting over whether the government can get soaring inflation under control, with the rising uncertainty stirring up memories of the devastating 2001 crisis in Latin America’s third largest economy.

The peso sank 3.2 percent against the US dollar, its sharpest one-day decline in the official exchange rate in years, despite heavy intervention by the central bank to ease the currency’s fall.

The dollar rose past seven pesos, compared to the year-ago rate of just five pesos to $1. The currency’s depreciation has accelerated since the beginning of the year, losing 8.4 percent.

With the government tightening foreign exchange controls to stem capital flight, on the black market for the peso sank to a new low of 12 per dollar.

The Central Bank of Argentina spent some $120 million to slow the drop, but that just added to the continuing erosion of the country’s foreign reserves.

Total reserves fell to $29.5 billion, down from $42 billion at the beginning of 2013 and at their lowest level since 2006.

The government doubled down on its currency controls, tightening restrictions on online purchases from abroad.

Such spending was already subject to a 50 percent tax on purchases of $25 or more.

Argentines will now be limited to just two online overseas purchases a year, each for $25 or less.

And each purchase must be reported to tax authorities.

Miguel Ramirez, a doctor, said the move would not stop online shoppers.

“The measure will be unpopular,” he said. “They want to place a barrier to discourage people. But thousands of packages will come and they have no way to control them all.”

Even so, the restrictions could add to the country’s inflationary spiral.

Last week, the government announced that 2013 inflation was just 10.9 percent, around the same level it has cited for several years running.

But private sector estimates considered reliable say inflation was 28.4 percent over the past year, up from the 26 percent pace they reported in October.

The newest measures show that the authorities’ efforts to get things under control have not worked.

Imports are already tightly restricted, and Argentines are hit with a 35 percent tax on purchases outside the country with credit cards.

Worries have increased that the country will not be able to service its debts.

In 2001, Argentina defaulted on some $100 billion in borrowed funds, and it took nearly a decade to restructure most of those debts to a sustainable level.

The current crisis has not gotten close to those proportions.

The economy is growing at a five percent rate and the country’s debt load is much smaller — in part due to lenders’ views that Argentina remains a high-risk investment.

“For the moment, Argentina has a better debt profile than European countries,” Pablo Tigani, director of consultancy Hacer, told AFP.

“And the level of reserves is enough to prevent speculative attacks on the currency.”

But there is rising uncertainty, especially over the government’s policies. In a recent speech, President Cristina Kirchner ignored the worries of the business community, saying nothing about inflation or the peso’s fall.

Instead, she announced a new monthly allowance for students.

And Argentina is still wrestling with debt problems from the past.

It faces a challenge in US courts from two hedge funds that bought the country’s debt at a hefty discount and did not join the restructuring deal, aiming to collect in full on it.

Buenos Aires has dubbed the funds “vultures,” but their court victories have put more pressure on the country’s debt service costs.

The country now hopes the US Supreme Court will accept its appeal and back its claim that the hedge funds already gave up any claim to repayment.

On Monday, Argentine officials moved to relaunch negotiations with creditors grouped as the Paris Club, hoping to set new payment terms on an estimated $10 billion in debt at penalties in arrears.

Buenos Aires faces another challenge at the International Monetary Fund.

Early last year, the Fund took the unprecedented step of censuring an IMF member, saying Argentina had made insufficient efforts to meet its standards for inflation and GDP data.

It gave Buenos Aires the rest of 2013 to produce better data.

But the country came up short again in December. The Fund’s executive board though gave it specific steps to take by March to avoid further censure.